Are expensive wines the next bubble?

Bubbles. By their very nature, they get big, and then, Splat! They burst. Dom-com stocks were bubbles. The housing market was a bubble. The Dow Jones of the last few years was a bubble. What did they have in common, and what does a bubble have to do with wine?

What they had in common was values so high, they were unsustainable. The Dow peaked at just below 14,000 in October, 2007, by far its highest ever. Now it’s scraping 9,000. Here in the San Francisco Bay Area, the newspapers reported two days ago that home prices, after rising to ridiculous levels, plunged in December to 31% lower than they were a year go, with the end nowhere in sight.

Now consider expensive California wine. These wines, led by Cabernet, are like the real estate market: Just as the number of million-dollar homes soared between 2001 and 2008, so too has the number of expensive wines. Robert Reich, the former Labor Secretary under Bill Clinton, recently analyzed the housing market in this gloomy article he wrote for the online periodical, RGE Monitor. Briefly, the economic downturn will force Baby Boomers to sell their homes over the next few years, downsizing to smaller homes and condos, or even renting. That will dump even more homes on the market than there already are, what with all the foreclosures, and that in turn will force housing prices even lower. Sounds like a death spiral. There were simply too many big, expensive homes built in the first place, and then easy credit led to a dash to buy. It was an unsustainable bubble, and now it’s burst.

Sounds to me like the expensive wine market. Just as there were too many pricey houses and not enough people who could afford them, so too there are too many pricey bottles, and not enough people able to buy them. I went over Wine Enthusiast’s database and counted 336 wines I’ve reviewed since 2004 that retailed for at least $80. Broken down by the year I tasted them, they were:

2004 and earlier: 1
2005: 67
2006: 98
2007: 71
2008: 99

So the number of expensive wines (judging by my unscientific count) appears to be growing, with the over-$80 segment up 47 percent in 4 years. That tells me it’s over-heated, just like home prices were.

When supply exceeds demand, there’s no getting around the economic consequence: prices must fall. That popping sound you hear is the cult wine bubble bursting. Who survives the shakeout? We’ll just have to wait and see. Not everybody will.

Hmmmm
I have mixed feelings about this. On the one hand, greed and reckless growth have created this problem. With the information available from all business in the past, you’d think that people would’ve have seen it coming. But when the money is flowing and times are good no one wants to think about the business musical chairs they are playing and they surely don’t think that when the music stops they won’t have a chair. Hard to feel sympathy.
On the other hand I worked in the wholesale wine business for over 10 yrs and have met many wonderful people and their families. Many restaurant owners and wine shop owners and when I realize that these good hard working people may lose their livelihoods, homes, land,businesses I can’t help but feel great sadness.
Sadness because I know real people are going to get crushed and not just balance sheets and corporate business models.
Too many times we are the vehicles of our own demise and I guess in the big scheme of things,that’s fair. But I can’t help but feel compassion for the people whose lives will go down the toilet.
That’s my 2 cents.

Thom, I really haven’t found mixed feelings. The wine folks I pal around with bought their properties at sensible prices, have manageable their debt, will eventually refinance at more favorable rates, and have developed a loyal customer base and huge margins. They paid their dues years ago, they were quick to reduce inventories with bulk sales at break even prices, and all have had a conservative “hunker down” plan B. They’ll probably stop buying me as many lunches and giving me as much wine, but everyone needs to sacrifice some, even me.

I have no sympathy for people who bought their way at silly prices into a business they do not understand and felt they could succeed by imitating, posturing, pretending, and pricing. If they don’t have a plan B, screw ’em, someone will take their land and do a better job for the customer.

On the retail side of the biz, my neighbors took us out to dinner the other night to a new restaurant where most of the wines on their list were $100 and above. The host wanted me to pick out the wines. I handed the list back to him, not wanting to be party to the silliness. He picked some big tag wines which I could not swallow figuratively and literally. The place was pretty much empty, a testament to Darwin’s insight.

Thankfully the wine bubble affects very few, (sucks to be a part of the few) in comparison to the tech & housing bubble and in fact was created in due part because of those two. This month’s Harper’s magazine has an interesting story with the premise that our business cycle has been replaced by a bubble cycle. Some savvy sparkling wine marketing type should latch onto that one.

I know of a wine brand that set a price for their Napa Valley Cab. It’s in a prominent sub region of a Napa AVA. We studied the market, compared the Cab to all others that are really well known, established brands in that region, and priced it accordingly.

Then, someone new came in, and without any regard to anything, the Cab went from $65 a bottle to $85 a bottle; with no rhyme or reason, just an idea.

This addresses higher priced wines, and where those prices come from: Not always from a marketing plan based on a cost/benefit analysis and projected incomes. Just pure ego and not realizing the perilous times we’re all living in.

I knew it was coming. Big time, puffed-up egotists who thought they could just “buy” their way into the CA wine industry and produce 95-pt wines overnight. Hey, how do we get the best grapes? We overpay by 3-fold and drive the Napa average price Cab price up and now everyone is screwed! What’s wrong with supporting the small guy who scrubbed laboratory floors to get where he is and always represented high-quality and set prices at fair and reasonable prices? Maybe I”m the bigger fool for believing that folks would buy my wine because I was selling value…